Asset Protection & Vacancy Clauses: Side Effects of Economic Downturn

When faced with economic downturn, especially related to downsizing, many Executives cite concerns surrounding human resource issues. How to handle employee layoffs? How will morale in the overall operations be affected by increased workloads? How has our liability changed now that employees are handling areas outside of their specialties?

While these are very important concerns, there is one exposure that is often overlooked. Are our assets still protected? When a company faces a consolidation of operations resulting in fewer locations, they may not have as much protection for the remaining vacant buildings. If a claim should result at an unoccupied location the insurance claim settlement could be drastically lower.

The Insurance Service Office (ISO) has defined a vacant building as one which “has been left vacant or unoccupied for a period of 60 consecutive days.” Once this standard has been met a loss at the location becomes subject to the policy’s vacancy clause. Typically the clause removes coverage occurring from the following perils:

Vandalism

Glass breakage

Water damage

Theft or attempted theft

Sprinkler leakage

In addition to the removal of these perils, any other covered cause of loss (fire, wind, etc.) will be penalized by 15%. For example, the total loss of a vacant building valued at $200,000 would be paid at $170,000.

Companies often find out after a loss has occurred that they are now facing a reduced settlement. Because the vacancy language is in the original language of the policy there is no premium reduction associated with the restriction of coverage.

There is coverage for vacant buildings which requires special underwriting. The premiums to insure a vacant building is typically higher due to the increase in exposure, however the vacant building will be provided full coverage in the event of a loss.